How Credit Scores are Calculated After Bankruptcy

: Chris Lee Law Firm

  Filed under: Credit Tips

credit after bankruptcyOne of the biggest reasons individuals hesitate filing for a Dallas bankruptcy is because they’re afraid of how their credit score will be affected. Even if bankruptcy will bring much needed financial relief, many debtors are overly cautious. However, the reality is that if you’re considering bankruptcy, your credit score is likely already being damaged, as you’re falling further behind on payments. Filing bankruptcy may create temporary damage to your credit score, but the fresh financial start will strengthen your portfolio in the long-term, especially with proper money management.

Understanding Texas Bankruptcy and Your Credit Score

The Fair Isaac Corporation (FICO) is behind the credit score calculations in the United States. Unfortunately, sensationalized news stories have largely exaggerated the negative effect that a bankruptcy will have on a credit report. Because bankruptcy will remain on your FICO credit score for seven years after the filing date, many residents are afraid to pursue this financial option. In reality, though, a temporary hit to your credit score now could certainly be worth it in the long run.

If you’re currently deliberating whether or not to file for bankruptcy but are afraid about its impact on your credit score, consider the following score components:

  • Payment history. Approximately 35 percent of your credit score is determined by on-time payments. If you’re considering bankruptcy, chances are that you’re already missing payments – and a good chunk of them. Repeatedly missing payments, which can be eliminated or reorganized through a bankruptcy, will only lower your credit score.
  • Debt-to-credit ratio. This composes 30 percent of your credit score. Using too much of your available credit can lower your credit score, because it suggests that you’re likely living on the edge of your financial means. On the other hand, a lower debt-to-credit ratio suggests good money management.
  • Other considerations. The age of your account (15 percent), any credit inquiries (10 percent), and a mixture of credit types (10 percent) will all determine the health of your credit score.

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